When you are self-employed you can charge your business for it’s use of your home, providing the costs are justifiable of course. We will do a post on how to calculate this in the future, but for now we want to let you know how you can charge your own Limited company rent as this is a very tax efficient way of extracting some of your companies profits.

workstation-405768_1280

It is perfectly acceptable for your Limited company to pay you for renting office space in your home but you must make sure that you follow the process carefully

  • Firstly work out what your actual running costs of your home are. If you own a property this can include mortgage interest but not capital repayments. If you rent then it is simply the rental charge. Other costs which you need to capture are Gas, Electricity, Insurance, Service Charges, Cleaning, Council tax

UPDATE MARCH 2017 – new rules around property interest relief for higher tax earners come in from April 2017 so if your earnings are above the basic tax band you will have to adjust your mortgage interest in your ‘use of home as office’ calculation accordingly. More info can be found on the changes HERE

 

  • You then need to work out what proportion of these costs would be fair to allocate to your business. The simple way of doing this is to firstly work out how many rooms you have in your house excluding bathrooms, kitchens and hallways. You then need to work out what % of the time you use one of the rooms for business use. Let’s assume you use one of your rooms as an office and 50% of the time that it is in use it is used for the business. Let’s then assume that in total you have 5 rooms excluding bathrooms, hallways and kitchens. If your total running costs of your house per year are £20,000 it would therefore be justifiable to charge £2,000 per year (50% x 1/5 x £20,000) to the business as rent.
  • In order for the cost to be allowable as a deduction for corporation tax in your companies accounts the charge must not be above what might be considered to be a fair market rent. You should therefore get a few local prices and save them as back up to your calculation
  • You can then draw up a license agreement between you and the company (if the house is in joint names the agreement will need to be with both joint owners and the company).
  • You should document a board minute and resolution approving the license agreement
  • Don’t forget that from a personal point of view you will be generating rental income – however as long as the actual costs of this are equal to the income then there is no taxable profit.
  • Don’t use one of your rooms entirely for business use – keep an element of personal use even if only small – this protects you from any potential capital gains tax issues

Two big benefits of doing this are:

  • You can extract the rent from your company tax free – although you are getting rental income personally, the cost of you supplying the office is equal to the income so there is no rental profit.

Leave a Reply